Tell Me What You See

I have had many calls (and have conducted conference calls) regarding what preferreds we like and with which preferreds we have concerns. First off, we like trust preferreds. A line has been drawn by the Treasury with the GSE preferreds. Trust preferreds have a debt component and have been treated as debt. They are actually senior to the bank preferreds purchased by the government. Yes, Paulson said banks will be permitted to pay preferred and equity dividends as long as they pay the government's dividends. I do not trust Paulson. If deemed necessary, the government can force the banks to do nearly anything as per the Treasury' emergency powers.

As for foreign preferreds, they are in the hands of the respective foreign governments and what they require of institutions receiving government support. Governments have been conspicuously silent on the matter. Our feeling is that they will not comment until they have to (when dividends have to be declared).

I have also received renewed interest in investigating collateral performance of their MBS. This is heartening for us. Rather than throwing the baby out with the bath water, advisers and clients are inquiring about the collateral backing their bonds. In most cases, the collateral is fine, in spite of the trading levels. The best MBS were issued prior to mid-2006.

I have been critical of PIMCO's Bill Gross talking his book. However, PIMCO is one of the best bond fund managers on the planet. The Wall Street Journal reports that PIMCO has been selling treasuries and buying GSE MBS. I agree with this strategy. Unlike private label MBS (which are only backed by the collateral), GSE MBS principal is backed by the GSEs. As government backing of GSE bonds is almost explicit, this is where we would look in the MBS market.

Also, this is not Bill Gross talking his book now, but Wall Street Journal reporting regarding what PIMCO has already done. The new supply of treasury securities should begin to push long-term rates higher. We would not be buyers of long-term treasuries. However, I would be a buyer of TIPs. TIPs breakevens are compelling. They should be. After all, deflation may be the norm for the next year. The time to buy tips is when inflation is tame, not after it begins to roar.